The Economist - USA (2022-01-29)

Theglobaleconomy

Acquired

immunity?

L

ate novemberalmost began to feel like

the  early  days  of  the  pandemic  all  over

again. Global stockmarkets fell as news of

what would come to be known as the Omi­

cron  variant  filtered  out  and  investors

feared either another round of restrictions,

or  that  people  would  shut  themselves

away. Two months on, Omicron’s impact is

slowly coming into focus. So far it is, large­

ly, better than feared. Markets are skittish,

but because of the prospect of higher inter­

est  rates,  rather  than  covid­19.  Goldman

Sachs,  a  bank,  has  constructed  a  share­

price index of European firms, such as air­

lines  and  hotels,  that  thrive  when  people

are able and willing to be in public spaces.

The index, a proxy for anxiety about the vi­

rus,  has  surged  relative  to  wider  stock­

markets in recent weeks. 

High­frequency economic data back up

the  cautious  optimism.  Nicolas  Woloszko

of  the  oecd,  a  rich­country  think­tank,

produces  a  weekly  gdp index  for  46  mid­

dle­  and  high­income  economies,  using

data from Google­search activity on every­

thing  from  housing  and  jobs  to  economic

uncertainty. Adapting his index, which has

been a good predictor of the official num­

bers,  we  estimate  that  gdp across  these

countries is about 2.5% below its pre­pan­

demic  trend  (see  chart  1).  That  is  a  little

worse  than  in  November,  when  gdpwas

1.6%  below  trend,  but  better  than  a  year

ago, when output was nearly 5% below it. 

A  few  factors  explain  why  the  worst

fears  about  the  variant’s  economic  effects

S AN FRANCISCO

How Omicron is affecting the

economic recovery

62 Finance&economics TheEconomistJanuary29th 2022

The  tightness  of  commodity  markets

makes prices all­too­sensitive to war talk.

During  the  global  financial  crisis  of  2007­

09  both  global  industrial  production  and

commodity  prices  plunged  in  tandem,

notes  Macquarie,  another  bank.  The  pan­

demic, by contrast, has been accompanied

by  a  surge  in  both  manufacturing  output

and raw­material prices. Unexpectedly ro­

bust  demand  and  supply­chain  disrup­

tions  fuelled  a  20%  rise  in  the  broad

Bloomberg  Commodities  Index  in  2021.

The prices of a dozen of its elements, from

cobalt  and  coffee  to  cotton  and  coal,  shot

up by even more.

Oil demand is roaring back towards pre­

pandemic  levels,  even  as  supply  has  been

slow to rise. Many members of the Organi­

sation  of  the  Petroleum  Exporting  Coun­

tries  and  its  allies  (which  include  Russia)

are struggling to meet their quotas for in­

creased  production,  because  of  under­

investment  and  covid­related  complica­

tions.  America’s  shale  firms  have  disco­

vered capital discipline, favouring investor

returns over drilling. The result is that glo­

bal  spare  production  capacity  is  falling  to

precariously low levels. Spare capacity for

many metals, too, is limited. 

If war breaks out, the oil price could rise

to  $120  a  barrel,  reckons  Natasha  Kaneva,

head of commodities strategy at JPMorgan

Chase, a bank. Ross Strachan of cru, a con­

sultancy, says aluminium prices could rise

to all­time highs. The precedent for the im­

pact  of  geopolitical  tensions  on  prices  is

not exactly heartening. When America im­

posed sanctions on Rusal, Russia’s largest

aluminium producer, in 2018, prices of the

metal were turbo­charged.

Russia  and  Ukraine  together  export

about 29% of the world’s wheat, and a big

chunk of Ukrainian cultivation takes place

in the regions that are most exposed to in­

vasion.  Carlos  Mera  of  Rabobank,  a  Dutch

firm, says withdrawing such volumes from

the market would have an “extraordinary”

impact,  because  the  demand  for  wheat  is

so inelastic. Prices could easily double, he

reckons.  That  would  trigger  a  struggle  to

secure supplies, especially among the

largeimportersofnorthernAfricaandthe

MiddleEast.

Somecountries,suchasChinaandIran,

mightbypassWesternsanctionsandbuy

Russianmetalsandgrainsatdiscounted

rates.Thatcouldinprincipleofferreliefby

satisfyingsomedemand.ButChinaand

Iran together imported 17m tonnes of

wheatlastyear,hardlya matchforRussian

andUkrainianexportsof59mtonnes.Fall­

inggrainstocksinAmerica andEurope

andbadweatherinSouthAmericathreat­

entostarvethemarketfurther,saysGeor­

dieWilkesofSucdenFinancial,a broker.

Moreover,Russiaisa bigproducerofurea

andpotash,importantingredientsforfer­

tilisers. An export embargo would give

grain prices a further leg­up. 

For  as  long  as  tensions  stay  high,  the

pivotal  role  of  energy  in  the  economy

means  price  rises  will  spill  over  to  other

markets,  even  if  sanctions  are  not  ulti­

mately deployed. Expensive power has al­

ready caused some aluminium smelters to

close in Europe. A surge in gas prices could

cause more furnaces to shut down. It could

also hit fertiliser production on the conti­

nent—for  which  gas  is  used  as  both  raw

material  and  fuel—hampering  the  next

growing season.

If  the  tensions  are  resolved  altogether,

then it might be possible to imagine mar­

kets cooling off. Europe endured a natural­

gas price shock last year, but a warm winter

means  that  “a  lot  of  angst  has  been  taken

out of the market, even though we still re­

main  at  very  elevated  price  levels”,  says

Saad Rahim of Trafigura, a trading firm. But

the  tightness  of  supply  means  that  prices

will cool off only a bit. Ms Kaneva reckons

that  the  risks  with  oil  are  asymmetric.  If

peace  prevails,  the  oil  price  would  merely

drop  to  $84  per  barrel.  But  if  war  breaks

out, “everything just goes up massively”.n

War-wary

Source:RefinitivDatastream *DutchTTFspot price

2

90

85

80

75

January 2022

2617101

Brentcrudeoil

price,$ perbarrel

100

90

80

70

60

January 2022

2617101

Natural gas*,

€ per megawatt hour

Caught in the crossfire